Fee-Only vs. Fee-Based Brokers
The Importance of Knowing How Brokers Earn Their Money
Brokers and financial advisors make money in a number of ways, including:
- Salary and commissions paid by their firms
- Hourly or flat-rate fees for their services
- Third party commissions
- Or a combination of these sources
Unfortunately, some financial professionals may try to pressure investors
into new investments that generate a commission for them (the broker)
even when those investments aren’t the best fit for the client.
Other fraudsters may try to hide outrageous fees by burying the fee structure
in the fine print, or just failing to mention it.
Fee-Only Investment Accounts
The financial industry has been moving toward a fee-only model in recent
years. Fee-only accounts are managed by financial advisors that do not
accept any fees or commissions based solely on their product sale. These
accounts primarily charge a percentage of assets under management, but
could also include other methods of charging clients, such as:
- Flat retainer
- Hourly rate
- Charge specific to the task at hand
Fee-only advisors have fewer inherent conflicts of interest and they generally
provide more comprehensive advice.
Commission-based brokers often take offense at this distinction. Blurring
the difference, they created the category “fee based,” which
means they charge a fee in addition to collecting commissions. Study after
study shows that even consumers seeking a strictly fee-only advisor find
these terms confusing, and can be easily misled.
A fee-only account may not be a right path for everyone. If you’re
going to trade only five to seven times per year, it’s probably
more economical for you to pay commission, as opposed to paying somebody
a percentage of your assets under management.
The takeaway is that it’s important to know how your broker is getting
paid in order to ensure that the fee structure is the best fit for you.
You can keep yourself informed by asking your broker directly about fees
and commissions, carefully reading through your brokerage agreement, and
reviewing your account statements and other documents to monitor fees